Analytical approach to producing and exchange activity

As criticism of the traditional theory of production and exchange has mounted in the postwar period, increasing attention has been given to new analytical approaches that seek either to supplant classical marginalism or to extend its scope[33]. In the latter category is the important body of literature that has grown up around the notion of property rights structures. The contributions here are quite diverse in style and content but are characterized by a common emphasis on certain basic ideas concerning the interconnectedness of ownership rights, incentives, and economic behaviour. The purpose of the present paper is to summarize the essential features of this line of research, examine some of its important areas of application, and discuss the promise the approach holds for improved understanding of economic problems.

The “property rights” literature begins with the presumption that modifications must be made in the conventional analytical framework if economic models having wider applicability are to be developed. Thus, several crucial changes are introduced into the theory of production and exchange.

1) First, an entirely new interpretation is given to the role of individual decision makers within the productive organisation. The organisation per se is no longer the central focus; rather, individuals are assumed to seek their own interests and to maximize utility subject to the limits established by the existing organisational structure.

2) Second, account is taken of the fact that more than one pattern of property rights can exist and that profit (or wealth) maximisation is not assured. By considering the effects of various possible property rights assignments on the penalty-reward system, detailed analysis of the interrelations between institutional arrangements and economic behaviour becomes feasible.

3) Third, transactions costs are recognized as being greater than zero in virtually all cases of practical importance. From a technical standpoint, these new ideas have straight-forward application. The usual procedure is to formulate an optimisation model that is analogous to, but in general distinct from the traditional profit maximisation case. In each instance, it is necessary to define the particular utility function that reflects the decision maker’s preferences, and to determine the actual set of options (penalties-rewards) that is attainable by the decision maker.

4) Then, the formal problem emerges as one of maximizing the utility function subject to the constraint imposed by the opportunity set. Of course, the usefulness of any such model depends on how skillfully the specification is made of the objective function and the opportunity set.

The rejection of profit maximisation as the fundamental behavioural postulate explaining the actions of decision makers in the business sector represents a simple yet important step. For, the shift to utility as the maximand opens up new possibilities for studying different patterns of managerial behaviour, and permits greater insight into the operation of business firms in various socio-economic environments[34]. This is so because regardless of the number, character, or diversity of the goals established by an individual decision maker, the goals can always be conceived as arguments in some type of utility function. And, as noted, the utility function can be maximized subject to appropriate constraints. Significantly, each decision maker is assumed to be motivated by self-interest and to move efficiently toward the most preferred operating position open. It follows, therefore, that under the conditions envisioned, marginalism is not rejected; the standard techniques are merely extended to new applications[35].

To engage in something more than purely formal discussion the utility function must be given specific interpretation. Boulding’s general comments on the “subjectivist” position make this clear.

If the firm will sacrifice “profits” (no matter how measured) for anything else, whether prestige, or good public or labour relations, or a quiet life, or liquidity, or security, or what have you, then it is clearly not maximizing profits. And if it is not maximizing profits it must be maximizing “utility,” which is simply a more elaborate way of saying that it does what it thinks best. This can hardly be untrue, but it is also not very helpful unless some content can be poured into the empty utility functions[36].

Relative to this argument, the property rights approach can be understood as an attempt to formulate empirically meaningful optimisation problems by associating the utility function with the individual decision maker and then introducing specific content into the function. In this way, it becomes possible to consider the behaviour of the decision maker within the firm, government bureau, or similar collective agency. The other key idea in the analysis is that different property rights assignments lead to different penalty-reward structures and, hence, decide the choices that are open to decision makers. An important shift of viewpoint is evident here. Instead of treating the firm as the unit of analysis and assuming that the owners’ interests are given exclusive attention via the process of profit maximisation, the utility maximizing model emphasizes individual adjustment to the economic environment and seeks to explain the behaviour of the firm and other institutions by observing individual actions within the organisation. In effect, an analytical basis is provided for examining the linkage between the objectives of decision makers and the particular strategies used to realize these objectives[37]. The presumption is, of course, that once human motivations are known, better understanding of the organisation’s allocation and use of resources becomes possible.

It is not difficult to accept the basic idea that “property rights” tend to influence incentives and behaviour[38]. The literature of the area, however, defines the concept of property rights with some precision and this special usage deserves comment. A central point noted is that property rights do not refer to relations between men and things but, rather, to the sanctioned behavioural relations among men that arise from the existence of things and pertain to their use. Property rights assignments specify the norms of behaviour with respect to things that each and every person must observe in his interactions with other persons, or bear the cost for nonobservance. The prevailing system of property rights in the community can be described, then, as the set of economic and social relations defining the position of each individual with respect to the utilisation of scarce resources

From a practical standpoint, the crucial task for the new property rights approach is to show that the content of property rights affects the allocation and use of resources in specific and predictable ways. For, without the latter assurance, there would be no possibility of developing analytically significant and empirically refutable propositions about the effects of various property rights assignments on the level and character of economic activity in the community. The essential assumption that systematic relations exist between property rights and economic choices lies in the background of discussion throughout the paper. At this stage, it is only necessary to emphasize one other point. Though sometimes forgotten, there should be no confusion about the fact that both trade and production involve contractual arrangements; these activities exist not so much to accomplish the exchange of goods and services but to permit the exchange of “bundles” of property rights. Permission to do things with the goods and services is at issue.

The value of any good exchanged depends, ceteris paribus, on the bundle of property rights that is conveyed in the transaction. For example, the worth of a house to an individual will be relatively greater if the bundle of property rights acquired contains the right to exclude gasoline stations, chemical plants, etc. from the immediate vicinity of the house. It follows that the set of various property rights held over resources enters into the utility function of the decision maker. Consequently, a change in the general system of property relations must affect the way people behave and, through this effect on behaviour, property rights assignments affect the allocation of resources, composition of output, distribution of income, etc. In the limit, one can say, as Alchian, that:

… In essence, economics is the study of property rights over scarce resources… The allocation of scarce resources in a society is the assignment of rights to uses of resources… the question of economics, or of how prices should be determined, is the question of how property rights should be defined and exchanged, and on what terms[39].

Date: 2016-03-03; view: 778